A Homeowner’s Guide to Using an Escrow Account for Your Property Taxes
When purchasing a new home, one term that often comes up is "escrow."
An escrow account is a financial tool used to manage ongoing payments for items such as your homeowner’s insurance and property taxes. Each month, a portion of your mortgage payment is set aside in this account, allowing your lender to handle payments on your behalf when they come due. This arrangement helps ensure that you meet your tax obligations without having to make large, lump-sum payments.
Understanding Escrow Accounts
An escrow account is a financial tool used by mortgage lenders to help manage property tax payments. When you take out a mortgage, a portion of your monthly payment is allocated to this account. Your lender or servicer collects these funds and holds them until your property taxes and insurance premiums are due. When payment time arrives, they disburse the funds on your behalf, ensuring that your obligations are met on time.
When it comes to property taxes, the amount each homeowner pays annually can vary depending on local tax rates as well as your property’s assessed value.
How is an Escrow Account Used to Manage Your Property Taxes?
The amount you pay into your escrow account is not static. Property taxes can fluctuate when your property is reassessed, affecting how much you need to set aside.
Every year, your lender will conduct an analysis of your escrow account. If they find that you’ve paid too much, you’ll receive an escrow refund. Conversely, if they’ve collected too little, you might need to make a one-time payment or adjust your monthly payment to cover the shortfall.
How Are Property Taxes Calculated?
Property taxes are determined through a process known as reassessment, where local assessors evaluate your property’s market value. The frequency of these reassessments varies by location—ranging from every year to every ten years. Generally, an increase in property taxes reflects local budget changes, such as school funding or infrastructure improvements.
How Property Taxes Affect Your Mortgage Payment
If your taxes rise, and your lender has collected insufficient funds, you may face an adjustment to your monthly payment to ensure your escrow account remains funded. If you anticipate a tax increase, it’s wise to contact your servicer proactively to adjust your payments accordingly.
Some homeowners opt to waive the escrow requirement and manage their property taxes independently. While this gives you more control, it also means you’ll need to keep track of your payments and due dates, which can be a challenge.
Benefits of Using an Escrow Account to Manage Your Property Taxes
For many homeowners, an escrow account offers significant advantages:
Convenience: You make a single monthly payment, and your lender handles the disbursement of funds for taxes and insurance, ensuring timely payments.
Financial Peace of Mind: You won’t need to scramble to come up with a large sum when taxes or insurance are due. Instead, you spread these costs out over the year.
Less Stress: Knowing that your taxes and insurance are being managed by your mortgage servicer can alleviate anxiety about potential late payments or shortages.
Closing Thoughts
Property tax escrow accounts are a significant component of homeownership, providing a structured way to manage your property tax payments. By understanding how these accounts work, you can navigate your mortgage with greater confidence and ease. If you have any questions about your escrow account or how property taxes affect your mortgage payment, don’t hesitate to give us a call or visit us online.